What is a stock and how much is it worth?

August 21, 2018

A stock is an offering of part ownership in a company.  Each part, — called a share—, is worth the price that buyers are willing to pay.  

A new stock is sold for the first time in the primary market.  The primary market is a private one comprised of the company’s founders, venture capitalists, and third parties such as banks and advisors.  Venture capitalists take a big risk that the company might fail.  In return, they have considerable influence on how the company is governed and operated.  They hope to earn a generous profit from selling their shares.

The stock may be sold again in the secondary market by public auction.  The secondary market is the familiar stock market where thousands of investors, —like us—,  trade cash for stocks and other exchange-traded securities.  We also hope to earn a generous profit from selling shares. Some companies may occasionally choose to pay us a cash bonus called a dividend.

Wise buyers seek the best price for a good company.  The best price is determined by ‘valuation’ and the quality of the company is assessed by ‘fundamental analysis’.

Copyright © 2018 Douglas R. Knight


Market participants

February 1, 2013

Participants.  The flow of capital between market participants creates investment opportunities.  The key participants are businesses who seek funds, investors who provide funding, and market makers who charge fees to transfer the funds 1.  About 75% of investors are millionaires-billionaires 2.  Among all participants, an estimated ninety million Americans invest in stocks and bonds  3,4.

InvestorsInstitutional investors make big trades in primary (wholesale) markets where issuers of securities and contracts receive large chunks of capital to operate businesses.  Institutions use a variety of strategies including arbitrage, speculation, and market making to earn profits in the primary and secondary markets.

Individual investors use the strategies of speculation and indexing to make small trades in the secondary (retail) market.  Do-it-yourself investors are individuals who make self-guided trades in the secondary market.

Celebrities. Benjamin Graham 5 introduced the world to two players of the stock market, ”Mr. Market” and “Intelligent Investor”, who possess quite different temperaments.  Mr. Market is moody; Intelligent Investor is contrary.  John Bogle described the ordinary player of the stock market, “Average Investor”.   “Average Investor” personifies the entire group of players who in theory earn the stock market’s return.  But “Average Investor” can never earn the market’s full return after paying the fees charged by brokers and money managers.

Copyright © 2012 Douglas R. Knight

References

1.         Ch11.  The Global Capital Market. Pages 380-406. Part 4 The Global Monetary System.  http://highered.mcgraw-hill.com/sites/dl/free/0073381349/324678/Global_Capital_Market.pdf

2.         Wealth management, Private pursuits.  The Economist, 20-22, May 19, 2012.

3.         Dennis Jacobe.  In U.S., 54% Have Stock Market Investments, Lowest Since 1999.  Americans point to real estate as the best long-term investment.  April 20, 2011. Copyright © 2012 Gallup, Inc. All rights reserved. http://www.gallup.com/poll/147206/stock-market-investments-lowest-1999.aspx .

4.         Chapter 6: Characteristics of Mutual Fund Owners.  2012 Investment Company Fact Book. Copyright © 2012 by the Investment Company Institute. All Rights Reserved. http://www.icifactbook.org/fb_ch6.html#mutual.


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